This week is somewhat light, but one order from Judge Panuthos in a CDP case breaks new ground. Additionally, the Court continues to make accommodations due to the fallout from the COVID-19 pandemic; Judge Gale and Petitioners’ counsel had to figure out how to accommodate a document that couldn’t be e-filed while the Court’s mailroom was shut down. I cover this issue in a separate post here.
The other major order came in Cannon Corp. v. Commissioner, where Judge Holmes denied summary judgment for Respondent in a 6751 penalty approval case. Keith previously covered this order here. Take a look at Keith’s post for details on this order from Judge Holmes (another order that I, again, must question why it doesn’t appear in an opinion).
Judge Kerrigan also issued an order granting Respondent’s motion for entry of decision where Petitioner tried to unwind previously filed stipulations.
Docket No. 11337-19L, Behn v. C.I.R. (Order Here)
Judge Panuthos’s order in Behn breaks, I think, some new ground on what expenses Appeals might permissibly consider in crafting a collection alternative for a taxpayer who cannot afford to pay their outstanding liability in full. The procedural background here is somewhat complex—only one year is properly before the Tax Court, but the Petitioner owes on 12 different tax years (some of which were previously resolved in a CDP case in the Tax Court by placing Petitioner’s accounts into currently not collectible status).
Here again, Petitioner received a Notice of Intent to Levy for multiple tax years and requested a CDP hearing. With the Form 12153, Petitioner included a direct debit installment agreement request, with a proposed monthly payment of $300. Petitioner participated in the telephone hearing that the Settlement Officer scheduled, but didn’t submit financial information ahead of the hearing. Nevertheless, the SO determined that he qualified to claim nearly $1,800 in monthly expenses. Set against his $4,300 in monthly pension income, this left him about $2,500 in net monthly income—far more than the $300 per month he’d proposed.
However, Petitioner raised in the CDP hearing the $1,800 per month he pays his spouse in “spousal support.” But there was no court order mandating this payment, which the IRS requires when proving monthly child support or spousal support payments, see I.R.M. 220.127.116.11 (“If alimony and child support payments are court ordered and being paid, they are allowable.”). Because of this, the SO stuck with the $2,500 proposed monthly payment, after review from her manager. Ultimately, the SO issued a Notice of Determination upholding the levy, for the reason that Petitioner failed to come into filing compliance for tax year 2012.
Judge Panuthos appears to find the issue of legal liability controlling—not whether the obligation is specified in a written court order. Apparently, under California law, one can potentially be liable for spousal support if the parties agree to provide support. He cites California Family Code § 4302, and the cases of Verdier v. Verdier, 36 Cal. 2d 241, 245 (1950) and In re Caldwell’s Estate, 67 Cal. App. 2d 652 (1945). Both of these cases suggest a court could find that the parties independently established a legally binding support agreement.
However, not all legal obligations qualify as necessary expenses under the Internal Revenue Manual. Credit card and personal loan expenses, for example, are not considered “necessary” and do not offset income, because they represent payment for a previous obligation incurred to buy some other expense (necessary or otherwise). See I.R.M. 18.104.22.168. Of course, those payments would be deemed as necessary under the IRM if a taxpayer fails to make those payments, and an unsecured creditor obtains a court judgment and the court then orders payments. Id. Still, these spousal payments are somewhat different, as they’re not as easily excluded as a policy matter as unsecured debts, given that they represent an independent payment obligation and don’t raise the “double counting” concern that likely excludes unsecured debts under the IRM.
Even if this expense were included, Petitioner’s net monthly income would still not be reduced to the $300 per month payment he proposed. It would, however, substantially reduce it to about $700 per month. And perhaps that would be agreeable.
Finally, I’ll note too that Judge Panuthos did not issue summary judgment because of the reason stated in the Notice of Determination: that Petitioner had failed to file his 2012 tax return. While not discussed in the order (I also haven’t reviewed Respondent’s motion), 2012 should not be, at this point, required to come into compliance under the Internal Revenue Manual, as the IRS generally only requires the past 6 years to be filed. See I.R.M. 22.214.171.124.1(4). This was also true at the time Appeals issued the Notice of Determination in July 2019, but not at the time of the Appeals hearing itself.
This will certainly be an interesting case to watch when it comes back to the Court.
Docket No. 22864-18, Minnig v. C.I.R. (Order Here)
This relatively uncomplicated bench opinion comes from Judge Kerrigan in a deficiency case. The facts here are simple. The taxpayer earned income reported on a Form W-2, but they filed a federal income tax return that reported $0 of income. So, the IRS issued a notice of deficiency.
Respondent apparently conceded the 6662 penalty and the 6651(a)(2) penalty, but won on the underlying tax liability and 6651(a)(1) penalty for failure to timely file the tax return. Aside from that, this is an easy win for Respondent. Apparently, Petitioner put forth numerous frivolous arguments, both as to the tax liability and the failure to file penalty, which Judge Kerrigan did not substantively address.
I defer to Judge Kerrigan’s view of the case and the situation at trial. But I do wonder if the section 6673 penalty was considered in this case—either by IRS counsel or by the Court.
Ultimately, the opinion does note that Respondent conceded two of the penalties at issue. The section 6651(a)(2) penalty doesn’t seem appropriate in any case; the taxpayer didn’t report anything as “tax on the return”, which is the only thing to which section 6651(a)(2) can apply. Rest assured that if the taxpayer continues to fail to pay, the IRS will swiftly assess the section 6651(a)(3) penalty for failure to pay after notice and demand.
It does not seem like there’s anything immediately wrong with imposing a section 6662(a) penalty for negligence. Indeed, Petitioner’s position seems to rise well above negligence. Perhaps Chief Counsel had a 6751 problem? Although hard to tell from the opinion itself, this might be a reason it would make sense not to impose the 6673 penalty. After all, multiple positions of the Commissioner in the Notice of Deficiency were, in fact, erroneous.
Docket No. 3057-19S, Nixon v. C.I.R. (Order Here)
Our last order comes from Judge Gale on Respondent’s motion to dismiss for lack of jurisdiction as to joint petitioners in a deficiency case.
Prior to filing the Tax Court petition, Mr. Nixon filed a bankruptcy petition. A review of both dockets reveals that Mr. Nixon filed a Chapter 13 petition on January 21, 2019 and filed the Tax Court petition on February 27, 2019, at which time the bankruptcy case was still open. That bankruptcy case was dismissed in October 2019, but Mr. Nixon refiled in November 2019, and that case still remains open.
The automatic stay provision of Bankruptcy Code section 362(a)(8) divests the Tax Court of jurisdiction until the bankruptcy case ends. Specifically, section 362(a)(8) says that “[a bankruptcy petition] operates as a stay . . . of . . . the commencement or continuation of a proceeding before the United States Tax Court concerning a tax liability . . . of a debtor who is an individual for a taxable period ending before the date of the [bankruptcy discharge order].”
Such bankruptcy debtors aren’t without recourse, however, in disputing the IRS’s determination in the Notice of Deficiency. The bankruptcy court itself could review determine the taxes owed for the disputed year—though see Bush v. United States, 939 F.3d 839 (7th Cir. 2019) (which Keith covered here)for some significant limitations on when the bankruptcy court might exercise its discretion to do so.
Alternatively, section 6213(f) contemplates this scenario, and provides that the 90 day period within which to petition the Tax Court is tolled from the time the bankruptcy petition is filed until the case is discharged or dismissed, plus 60 days. Helpfully, Judge Gale includes a citation to this corollary provision that for Mr. Nixon’s benefit.
In any case, Mr. Nixon had no ability to commence a case in his own right when he did. So, Respondent filed its motion to dismiss the case as to Mr. Nixon—but not as to Mrs. Nixon, who was not a party to either bankruptcy case. Judge Gale explains the law above and grants Respondent’s motion. He also notes that Mrs. Nixon and Respondent had agreed to settle the case; the stipulated decision reveals the parties settled for a deficiency of $3,000 and $4,500 for 2015 and 2016, respectively. They also agreed that no penalties would be imposed. I don’t have access to the underlying Notice of Deficiency, but this sounds like a reduction to the amounts the IRS proposed.
So, what happens to Mr. Nixon? The IRS cannot assess the amount proposed in the Notice of Deficiency against Mr. Nixon because of (1) the automatic stay and (2) the 6213 prohibition that is now continued under 6213(f). But because the tax is joint and several for a jointly filed return under section 6013(d)(3), and because Mrs. Nixon has agreed to waive the restrictions on assessment under 6213 as to herself, the IRS will assess the settled amount against her.
Let’s say that she pays it, Mr. Nixon agrees with that result, and then doesn’t petition the Tax Court as Judge Gale suggests he could. Could the IRS assess the (likely larger) tax contemplated in the Notice of Deficiency against Mr. Nixon? I think it could. Will it? No. The Service’s policy is to provide the same assessment amount for jointly filed tax returns, even if only one party to the joint assessment invoked the Tax Court’s jurisdiction.
I had a similar case involving a taxpayer’s widow, who did not want to open an estate for the mere purpose of ratifying the petition. Counsel assured me that the IRS would assess the tax on both accounts based on the Tax Court settlement; that is indeed what occurred.
One interesting counterfactual question: let’s say that Mr. Nixon’s bankruptcy case had concluded by the time the Tax Court was ready to rule on Respondent’s motion to dismiss. Would the Tax Court have allowed Mr. Nixon to ratify the Petition?
No. The automatic stay bars the ability of a taxpayer to petition the Tax Court in the first instance. Those were also the facts in McClamma v. Commissioner, which Judge Gale cites in his order. The taxpayer would need to file a new petition, within the extended time frame under section 6213(a) & (f).
But what if by the time the motion was ready for review, Mr. Nixon’s time to file the Petition under 6213(f) had expired? Same story. As above, his time to file a petition in the Tax Court would have expired, and the IRS would proceed to assess the tax—albeit in the reduced amount noted above. As readers are aware, the Tax Court has taken a stringent view of its jurisdictional grants and while judges often write that they are “sympathetic” to the taxpayer’s situation, they nevertheless dismiss the case for lack of jurisdiction. Equity plays little role. See, e.g., Zimmerman v. Commissioner, 105 T.C. 220 (1995) (dismissing where the bankruptcy court notified petitioners of the discharge 137 after it was entered—leaving petitioner with only 13 days to file); Drake v. Commissioner, 123 T.C. 320 (2004) (dismissing a standalone innocent spouse case, even though section 6015 lacks a tolling provision similar to section 6213(f)); Prevo v. Commissioner, 123 T.C. 326 (2004) (same for CDP petitions).